Chapter 9 MCQ

Question 1

Using money as a medium of exchange is more efficient than barter because

A.
money is the only asset that can be used as a store of value.
B.
money dominates all products and services as a store of value.
C.
barter requires a double coincidence of wants.
D.
bonds pay interest comma but do not have liquidity.

Answer 1

C.

An asset is a store of value if it can be used to transport purchasing power from one time period to another. Many assets – such as real​ estate, stocks,​ bonds, and gold – fit this definition.

The problem with barter exchange is that you must find a trading partner who not only is selling what you​ want, but who also​ wants–is willing to​ accept–what you are selling. Economists call this problem the double coincidence of wants. Since money is accepted as payment for all goods and​ services, it eliminates the need for a double coincidence of wants. In other​ words, in order to​ trade, I​ don’t have to find someone who has what I​ want, and that person​ doesn’t have to want what I have.

Question 2

Economists view the demand for money as basically a demand for

A.
investment.
B.
status.
C.
liquidity.
D.
all of the above.

Answer 2

C.

Liquidity is the ease with which assets can be converted into the​ economy’s medium of exchange. Money – which is by definition the medium of exchange – is the most liquid of all assets. All reasons for wanting to hold money and give up earned interest are summarized in one word – liquidity.

Question 3

Suppose the interest rate on bonds is very low 2​% per year. If you invest​ $100 of your savings in a​ bond, at the end of the year you get back ​$___

Since your bond payoff is​ low, you might as well keep most of your wealth in the form of​ money, to have the convenience of ____
. Now imagine that the interest rate on bonds is​ 15% per​ year, so each​ $100 investment yields $___ at the end of the year
. By choosing bonds you
_____
your assets. From this example it is apparent that there is
_____
relation between the interest rate and the quantity demanded of money.

A. 102
B. $100.20
C $120

A. Financing
B. Trading
C. Liquidity

Answer 3

1. $102
2. Liquidity
3. $115
   4, Increase
4. An inverse

Question 4

When real GDP increases it will cause the demand for money to

A.
decrease.
B.
either increase or decrease.
C.
become less liquid.
D.
increase.

Answer 4

D.

An increase in real GDP causes an increase in the demand for money. A decrease in real GDP causes a decrease in the demand for money. An increase in average prices causes an increase in the demand for money. A decrease in average prices causes a decrease in the demand for money.

Question 5

When Kate and Sam use dollars to compare the worth of their respective cars, money is acting as a

A.
store of value.
B.
standard of purchase.
C.
unit of account.
D.
medium of exchange.

Answer 5

C.

Money performs the following three basic economic​ functions: medium of​ exchange, unit of​ account, and store of value. This function is a standard unit for measuring and comparing prices or a unit of account.

Question 6

A decrease in prices will cause the demand for money to

A.
decrease.
B.
become less liquid.
C.
either increase or decrease.
D.
increase.

Answer 6

A.Decrease

Question 7

If Sudir withdrew $ 500 in cash from a savings account and deposited it into a chequing account​,

A.
​M1+ decreased and​ M2+ increased.
B.
M1+ increased and M2+ was unchanged.
C.
M1+ and M2+ both decreased.
D.
M1+ increased and M2+ decreased.

Answer 7

b.

Supply of money in Canada consists of currency and deposit money.
- ​M1+ = currency in circulation and demand​ (chequing) deposits.
-​ M2+ = M1 plus all other less liquid​ (savings) deposits.
Sudir withdrew $ 500 in cash from a savings account and deposited it into a chequing account.

The withdrawal converted an M2+ asset into an M1+ asset. M1+ is part of M2+.
M1+ increased and M2+ was unchanged.

Question 8

Fiat money

A.
includes balances in bank accounts that can be withdrawn on demand.
B.
is paper money that can be converted into gold on demand.
C.
is a tradeable product with alternative uses serving as money.
D.
includes government issued paper bills.

Answer 8

d.

Question 9

Deposit money

A.
is a tradeable product with alternative uses serving as money.
B.
is against the law to use.
C.
includes balances in bank accounts that can be withdrawn on demand.
D.
is paper money that can be converted into gold on demand.

Answer 9

C.

Question 10

Commodity money

A.
is paper money that can be converted into gold on demand.
B.
includes balances in bank accounts that can be withdrawn on demand.
C.
is a saleable product with alternative uses serving as money.
D.
is against the law to use.

Answer 10

is a saleable product with alternative uses serving as money.

Question 11

Convertible paper money

A.
is a tradeable product with alternative uses serving as money.
B.
is against the law to use.
C.
includes balances in bank accounts that can be withdrawn on demand.
D.
is paper money that can be converted into gold on demand.

Answer 11

D. is paper money that can be converted into gold on demand.

Question 12

If you deposit ​$1,000 ​cash, and your bank chooses to keep 20 percent of deposits as​ reserves, it can create

A.
​$1,000 in new money.
B.
​$600 in new money.
C.
​$800 in new money.
D.
​$200 in new money.

Answer 12

c.

Question 13

If you deposit ​$5 comma 000 ​cash, and your bank chooses to keep 20 percent of deposits as​ reserves, it can create
Part 2
A.
​$5,000 in new money.
B.
​$1,000 in new money.
C.
​$3,000 in new money.
D.
​$4,000 in new money.

Answer 13

D.

Banks create loans and money​ (demand deposits) together in a​ fractional-reserve banking system. If you deposit ​$5,000​, and the bank must keep 20 percent of deposits on​ reserve, the amount of reserves is ​$1,000 ​($5,000 X 0.20​). The remaining ​$4,000 can be loaned​ out, creating new demand deposits and creating new money.

Question 14

Banks face a​ trade-off between prudence and profit because

A.
they do not earn a profit on deposits not loaned out.​ However, lending out too much creates a risk that they will not be able to meet their withdrawal needs.
B.
they are regulated.
C.
their depositors demand that the bank make risky loans in order to earn higher interest rates.
D.
they earn a small profit on deposits that are not loaned​ out, but a larger profit when the funds are loaned out.

Answer 14

A.

The more deposits that banks turn into​ loans, the greater the potential profits.​ Higher-risk loans earn the most interest. More loans mean more demand deposits created for​ borrowers’ accounts. This situation is riskier for banks because they may not be able to meet the demands of​ depositors’ withdrawals

Question 15

Bond prices and interest rates are

A.
directly related and determined in only the loanable funds market.
B.
directly related and determined in only the money market.
C.
inversely related and determined together in the money and loanable funds markets.
D.
directly related and determined together in the money and loanable funds markets.

Answer 15

C.

Bond prices and interest rates are inversely related and determined together in the money and loanable funds markets. This inverse relation between bond prices and interest rates is the most important feature of all bond markets. Bond prices and interest rates are instantly connected in both directions. If interest rates​ rise, bond prices fall. If interest rates​ fall, bond prices rise.

Question 16

When there is excess supply of ​money,

A.
people buy bonds to get rid of money. The increased demand for bonds causes bond prices to rise and interest rates to fall.
B.
people buy bonds to get rid of money. The increased demand for bonds causes bond prices to fall and interest rates to rise.
C.
people sell bonds to get more money. The increased supply of bonds causes bond prices to rise and interest rates to fall.
D.
people sell bonds to get more money. The increased supply of bonds causes bond prices to rise and interest rates to rise.

Answer 16

A.

When there is excess supply of​ money, people buy bonds to get rid of money. The increased demand for bonds causes bond prices to rise and interest rates to fall.

Question 17

When there is excess demand for ​money,

A.
people buy bonds to get rid of money. The increased demand for bonds causes bond prices to fall and interest rates to rise.
B.
people sell bonds to get more money. The increased supply of bonds causes bond prices to rise and interest rates to fall.
C.
people buy bonds to get rid of money. The increased demand for bonds causes bond prices to fall and interest rates to fall.
D.
people sell bonds to get more money. The increased supply of bonds causes bond prices to fall and interest rates to rise.

Answer 17

D.

When there is excess demand for​ money, people sell bonds to get more money. The increased supply of bonds causes bond prices to fall and interest rates to rise.

Question 18

If interest rates rise​, the market price of bonds

A.
rises. If you sell the bond you take an unexpected loss.
B.
rises. If you sell the bond you make an unexpected profit.
C.
falls. If you sell the bond you make an unexpected profit.
D.
falls. If you sell the bond you take an unexpected loss.

Answer 18

D.

When interest rates rise​, the price of a bond you are holding falls. If you want to convert your bond back to money by selling​ it, you will receive less money than you paid for the bond. You will take an unexpected loss on your investment.

Question 19

If interest rates fall​, the market price of bonds

A.
falls. If you sell the bond you make an unexpected profit.
B.
rises. If you sell the bond you make an unexpected profit.
C.
falls. If you sell the bond you take an unexpected loss.
D.
rises. If you sell the bond you take an unexpected loss.

Answer 19

B.
When interest rates fall​, the price of a bond you are holding rises. If you want to convert your bond back to money by selling​ it, you will receive more money than you paid for the bond. You will make an unexpected profit on your investment.

Question 20

Which of the following statements is​ true?

A.
Interest rates on mortgages and interest rates on saving accounts move in opposite directions.
B.
There is one official interest​ rate, but other indicator rates influence the official interest rate.
C.
There are many interest​ rates, and they move independently of each other.
D.
All interest rates tend to rise together and fall together.

Answer 20

D.

There are many different interest rates for different financial assets. Interest rates tend to all rise at the same time and fall at the same time. So the stories about how​ “the” interest rate is determined apply generally to all interest rates.

Question 21

Interests rates

A.
are usually lower on low-risk bonds than on high-risk bonds.
B.
for low-risk bonds are fixed.
C.
for​ short-term bonds tend to rise when interest rates for​ long-term bonds fall.
D.
are usually lower on high-risk bonds than on low-risk bonds.

Answer 21

A.

There are many different interest rates for different financial​ assets; high minus risk investments usually have higher interest rates than  low minus risk investments.

Question 22

Interests rates
Part 2
A.
are usually lower on long-term bonds than on short-term bonds.
B.
are usually lower on short term bonds than on long term bonds.
C.
for short-term bonds are fixed.
D.
for​ short-term bonds tend to rise when interest rates for​ long-term bonds fall.

Answer 22

B.

There are many different interest rates for different financial​ assets; long-term investments usually have higher interest rates than short-term investments.

Question 23

Money can directly affect

A.
government spending.
B.
aggregate supply.
C.
the price level.
D.
unemployment.

Answer 23

C.
The quantity theory of money states that money can directly affect inflation. An increase in the supply of money can increase the average price level.​ However, money does not directly increase aggregate supply or directly contribute to economic growth. Changes in the demand or supply of​ money, however, can indirectly affect real​ GDP, unemployment, and business cycles.

Question 24

According to the domestic monetary transmission​ mechanism, less money causes

A.
a negative aggregate demand shock, decreased real GDP, decreased unemployment, and falling average prices.
B.
a positive aggregate demand shock, increased real GDP, decreased unemployment, and rising average prices.
C.
a negative aggregate demand shock, increased real GDP, increased unemployment, and rising average prices.
D.
a negative aggregate demand shock, decreased real GDP, increased unemployment, and falling average prices.

Answer 24

D.

According to the domestic monetary transmission​ mechanism, less money causes higher interest​ rates, which increase the cost of​ borrowing, decrease consumption and investment​ spending, and cause a negative aggregate demand shock. This causes decreased real​ GDP, increased ​unemployment, and falling average prices.

Question 25

According to the domestic monetary transmission​ mechanism, more money causes

A.
a negative aggregate demand shock, decreased real GDP, increased unemployment, and falling average prices.
B.
lower interest rates, which decrease the cost of borrowing and increase consumption and investment spending.
C.
a positive aggregate demand shock, increased real GDP, increased unemployment, and rising average prices.
D.
a positive aggregate demand shock, decreased real GDP, decreased unemployment, and falling average prices

Answer 25

B.

According to the domestic monetary transmission​ mechanism, more money causes lower interest​ rates, which decrease the cost of​ borrowing, increase consumption and investment​ spending, and cause a positive aggregate demand shock. This causes increased real​ GDP, decreased ​unemployment, and rising average prices.

Question 26

According to the domestic monetary transmission​ mechanism, less money causes

A.
higher interest rates which decrease the cost of borrowing and increase consumption and investment spending.
B.
higher interest rates which increase the cost of borrowing and increase consumption and investment spending.
C.
higher interest rates, which increase the cost of borrowing and decrease consumption and investment spending.
D.
lower interest rates which decrease the cost of borrowing and decrease consumption and investment spending.

Answer 26

C.

Less money causes higher interest rates, which decrease consumption and investment spending.

Question 27

According to the domestic monetary transmission​ mechanism, less money causes

A.
higher interest rates, which increase the cost of borrowing and decrease consumption and investment spending.
B.
a negative aggregate demand shock, increased real GDP, increased unemployment, and rising average prices.
C.
a negative aggregate demand shock, decreased real GDP, decreased unemployment, and falling average prices.
D.
a positive aggregate demand shock, increased real GDP, decreased unemployment, and rising average prices.

Answer 27

A.

According to the domestic monetary transmission​ mechanism, less money causes higher interest​ rates, which increase the cost of​ borrowing, decrease consumption and investment​ spending, and cause a negative aggregate demand shock. This causes decreased real​ GDP, increased ​unemployment, and falling average prices.

Question 28

Through the domestic monetary transmission​ mechanism, higher interest rates cause

A.
deflation and decreased real GDP.
B.
inflation and increased real GDP.
C.
inflation and decreased real GDP.
D.
deflation and increased real GDP.

Answer 28

A.

​- Lower interest rates are a positive demand​ shock, increasing aggregate​ demand, increasing real​ GDP, decreasing​ unemployment, and causing inflation.
​- Higher interest rates are a negative demand​ shock, decreasing aggregate​ demand, decreasing real​ GDP, increasing​ unemployment, and causing deflation.

Question 29

Through the domestic monetary transmission​ mechanism, lower interest rates cause

A.
deflation and decreased real GDP.
B.
deflation and increased real GDP.
C.
inflation and increased real GDP.
D.
inflation and decreased real GDP.

Answer 29

C.

• Lower interest rates are a positive demand​ shock, increasing aggregate​ demand, increasing real​ GDP, decreasing​ unemployment, and causing inflation.
  ​- Higher interest rates are a negative demand​ shock, decreasing aggregate​ demand, decreasing real​ GDP, increasing​ unemployment, and causing deflation.

Question 30

Through the domestic monetary transmission​ mechanism, increases in money demand cause

A.
deflation and increased real GDP.
B.
deflation and decreased real GDP.
C.
inflation and increased real GDP.
D.
inflation and decreased real GDP.

Answer 30

B.

When there is excess demand for​ money, people sell bonds to get more money. The increased supply of bonds causes bond prices to​ fall, and interest rates to rise. When there is excess supply of​ money, people buy bonds to get rid of money. The increased demand for bonds causes bond prices to​ rise, and interest rates to fall.
​- Lower interest rates are a positive demand​ shock, increasing aggregate​ demand, increasing real​ GDP, decreasing​ unemployment, and causing inflation.
​- Higher interest rates are a negative demand​ shock, decreasing aggregate​ demand, decreasing real​ GDP, increasing​ unemployment, and causing deflation.

Question 31

Through the domestic monetary transmission​ mechanism, decreases in money demand cause

A.
inflation and decreased real GDP.
B.
deflation and increased real GDP.
C.
deflation and decreased real GDP.
D.
inflation and increased real GDP.

Answer 31

D.

When there is excess demand for​ money, people sell bonds to get more money. The increased supply of bonds causes bond prices to​ fall, and interest rates to rise. When there is excess supply of​ money, people buy bonds to get rid of money. The increased demand for bonds causes bond prices to​ rise, and interest rates to fall.
​- Lower interest rates are a positive demand​ shock, increasing aggregate​ demand, increasing real​ GDP, decreasing​ unemployment, and causing inflation.
​- Higher interest rates are a negative demand​ shock, decreasing aggregate​ demand, decreasing real​ GDP, increasing​ unemployment, and causing deflation.

Question 32

Money indirectly affects
Part 2
A.
government spending.
B.
real GDP.
C.
inflation.
D.
the central bank.

Answer 32

B.

Question 33

The​ “Yes” and​ “No” camps agree that

A.
money helps markets quickly adjust to equilibrium.
B.
money affects prices and inflation.
C.
markets quickly adjust back to equilibrium at potential GDP and full employment.
D.
business cycles happen often.

Answer 33

B.

Question 34

The​ “Yes” and​ “No” camps agree that

A.
business cycles happen rarely.
B.
markets quickly adjust back to equilibrium at potential GDP and full employment.
C.
money helps markets quickly adjust to equilibrium.
D.
changes in the demand and supply of money can indirectly affect real GDP.

Answer 34

D.

“Yes - Markets Quickly​ Self-Adjust” answer​ - “not​ much.”
​- Money does not affect external supply shocks that are main source of business cycles.
​- Money allows savings to flow easily through the loanable funds market to encourage business borrowing for investment spending.
​- Money helps markets quickly adjust to equilibrium.
​”No - Markets Fail​ Often” answer​ - “a​ lot.”
​- Money gives people a way not to spend but to​ save, creating the possibility of financial​ crises, adding new internal demand shocks for business cycles.
​- Money blocks the domestic transmission mechanism so the loanable funds market does not match spending to savings.
​- Money slows​ markets’ adjustments to equilibrium.

Question 35

The​ “Yes” and​ “No” camps disagree about

A.
whether or not changes in the demand and supply of money can indirectly affect real GDP.
B.
whether money affects prices and inflation.
C.
whether money exchange is better than barter exchange.
D.
how quickly markets adjust back to equilibrium at potential GDP and full employment.

Answer 35

D.

Question 36

The​ “Yes” and​ “No” camps disagree about

A.
whether or not changes in the demand and supply of money can indirectly affect real GDP.
B.
whether money exchange is better than barter exchange.
C.
how often business cycles happen.
D.
whether money affects prices and inflation.

Answer 36

C.

Question 37

the​ “Yes” and​ “No” camps disagree about

A.
whether money helps markets quickly adjust to equilibrium.
B.
whether money affects prices and inflation.
C.
whether money exchange is better than barter exchange.
D.
whether or not changes in the demand and supply of money can indirectly affect real GDP.

Answer 37

A.

Question 38

How much does money matter for business​ cycles? According to the ‘Yes, markets left alone will adjust’ camp

A.
money creates new shocks.
B.
money blocks the transmission mechanism and slows the adjustment to equilibrium.
C.
money has no effect.
D.
money adds new external supply shocks.

Answer 38

C.

For J. B. Say and the​ “Yes, markets quickly​ self-adjust” camp, money does not matter much for business cycles. Money introduces no new supply or demand​ shocks, and allows savings to flow easily through the loanable funds market to facilitate business borrowing for investment spending. Money helps markets quickly adjust to​ equilibrium, so government can keep its hands off. Aggregate supply and aggregate demand will match at potential real GDP and full employment.

Question 39

How much does money matter for business​ cycles? According to the ‘Yes, markets left alone will adjust’ camp

A.
money adds new external supply shocks.
B.
money blocks the transmission mechanism and slows the adjustment to equilibrium.
C.
money creates new shocks.
D.
money helps loanable funds adjust quickly to equilibrium.

Answer 39

D.

For J. B. Say and the​ “Yes, markets quickly​ self-adjust” camp, money does not matter much for business cycles. Money introduces no new supply or demand​ shocks, and allows savings to flow easily through the loanable funds market to facilitate business borrowing for investment spending. Money helps markets quickly adjust to​ equilibrium, so government can keep its hands off. Aggregate supply and aggregate demand will match at potential real GDP and full employment.

Question 40

How much does money matter for business​ cycles? According to the ‘No, markets left alone fail to adjust’ camp
Part 2
A.
money creates new shocks.
B.
money has no effect.
C.
money adds new external supply shocks.
D.
money helps loanable funds adjust quickly to equilibrium.

Answer 40

A.

For J. M. Keynes and the​ “No, markets fail to quickly​ adjust” camp, money matters a lot for business cycles. Money gives people a way to not​ spend, adding new internal demand shocks and the possibility of financial crises with fractional reserve banking. Money can also block the transmission mechanism so that the interest rate in the loanable funds market may not adjust spending and aggregate demand to match aggregate supply. Money slows​ markets’ adjustments to​ equilibrium, so government needs to be​ hands-on, or the economy may never achieve potential GDP and full employment.

Question 41

How much does money matter for business​ cycles? According to the ‘No, markets left alone fail to adjust’ camp
Part 2
A.
money has no effect.
B.
money helps loanable funds adjust quickly to equilibrium.
C.
money adds new external supply shocks.
D.
money adds new internal shocks.

Answer 41

D.

For J. M. Keynes and the​ “No, markets fail to quickly​ adjust” camp, money matters a lot for business cycles. Money gives people a way to not​ spend, adding new internal demand shocks and the possibility of financial crises with fractional reserve banking. Money can also block the transmission mechanism so that the interest rate in the loanable funds market may not adjust spending and aggregate demand to match aggregate supply. Money slows​ markets’ adjustments to​ equilibrium, so government needs to be​ hands-on, or the economy may never achieve potential GDP and full employment.

Question 42

With which statement would the ​”Yes​” camp disagree​?

A.
External supply shocks are the main contributors to business cycles.
B.
Money affects external supply shocks.
C.
Money helps markets adjust to equilibrium.
D.
All of the above.

Answer 42

B.

Economists disagree on the question​ “How much does money matter for business cycles and how quickly markets​ adjust?”
​”Yes - Markets Quickly​ Self-Adjust” answer​ - “not​ much.”
​- Money does not affect external supply shocks that are main source of business cycles.
​- Money allows savings to flow easily through the loanable funds market to encourage business borrowing for investment spending.
​- Money helps markets quickly adjust to equilibrium.
​”No - Markets Fail​ Often” answer​ - “a​ lot.”
​- Money gives people a way not to spend but to​ save, creating the possibility of financial​ crises, adding new internal demand shocks for business cycles.
​- Money blocks the domestic transmission mechanism so the loanable funds market does not match spending to savings.
​- Money slows​ markets’ adjustments to equilibrium.

Question 43

With which statement would the ​”No​” camp disagree​?

A.
Money gives people a way not to spend.
B.
Money helps markets adjust to equilibrium.
C.
Money can block the transmission mechanism between interest rates and aggregate demand.
D.
All of the above.

Answer 43

B.

Economists disagree on the question​ “How much does money matter for business cycles and how quickly markets​ adjust?”
​”Yes - Markets Quickly​ Self-Adjust” answer​ - “not​ much.”
​- Money does not affect external supply shocks that are main source of business cycles.
​- Money allows savings to flow easily through the loanable funds market to encourage business borrowing for investment spending.
​- Money helps markets quickly adjust to equilibrium.
​”No - Markets Fail​ Often” answer​ - “a​ lot.”
​- Money gives people a way not to spend but to​ save, creating the possibility of financial​ crises, adding new internal demand shocks for business cycles.
​- Money blocks the domestic transmission mechanism so the loanable funds market does not match spending to savings.
​- Money slows​ markets’ adjustments to equilibrium.

Question 44

Followers of J. B. Say and J. M. Keynes disagree on how money

A.
causes inflation.
B.
should be supplied.
C.
affects the loanable funds market.
D.
none of the above.

Answer 44

c.

Economists disagree on the question​ “How much does money matter for business cycles and how quickly markets​ adjust?”
In​ particular,
for J. B. Say and the​ “Yes, markets quickly​ self-adjust” camp,
​- Money allows savings to flow easily through the loanable funds market to encourage business borrowing for investment spending.
For J. M. Keynes and the​ “No, markets fail to quickly​ adjust” camp,
​- Money blocks the domestic transmission mechanism so the loanable funds market does not match spending to savings.